TWA Discloses Big Stake in Merger Target USAir : Transportation Dept. Refuses Quick Approval of the Proposed Transaction

NEW YORK —  Trans World Airlines, disclosing a move that increases the likelihood of a fight for control of USAir Group, announced Friday that it has boosted its holdings in the Virginia-based carrier to 4 million common shares, 15% of the total.

TWA on Wednesday offered to buy USAir for $1.6 billion; USAir rejected the offer Thursday as “grossly inadequate.” TWA said Friday that it “may acquire additional USAir stock.”

In Washington, meanwhile, the Transportation Department rejected TWA’s request for immediate approval for its bid for USAir, saying the application “clearly fails to comply” with federal rules on airline mergers.

The department said TWA had submitted the application without necessary supporting documents and had “provided no reason why we should accept such a deficient filing.” It added that the airline may file a new application when it can provide supporting documentation.

The department, however, said it would continue to consider a second request by TWA that it be allowed to continue buying USAir stock and put the stock into a voting trust until a final decision on the proposed merger is made by the government.

Shortly after the TWA announcement, Dow Jones News Service reported speculation that Norfolk Southern may have been the buyer of large blocks of USAir stock on Friday and that there are rumors that Norfolk Southern may make a $58-a-share bid for USAir.

Wall Street sources speculated that Norfolk Southern may be interested in buying both USAir and Piedmont Aviation of North Carolina, parent of Piedmont Airlines. Norfolk Southern, a railroad firm headquartered in Norfolk, Va., is already in a bidding war with USAir for Piedmont.

Largest Shareholder

Carl C. Icahn, the financier who owns 73% of New York-based TWA and who disclosed this week that he is USAir’s largest single shareholder, has offered $52 a share for USAir. Icahn has suggested that he might be interested in a three-way merger of TWA, USAir and Piedmont.

Icahn has not yet filed a report required by the Securities and Exchange Commission when an investment in a public company reaches 5% of the company’s stock. However, he said in a telephone interview Friday that a filing is imminent.

Norfolk Southern, Piedmont and USAir would not comment on the latest developments.

Whether Icahn seriously intends to acquire USAir or simply trigger a counteroffer for his TWA holdings is the subject of much speculation. “All things are possible,” said Mark Buckstein, TWA’s general counsel. “Anything to the limits of your imagination.”

Some Wall Street observers maintain that Icahn has never really wanted to be in the airline business. Similar allegations were made 18 months ago, however, when he was slowly acquiring control of TWA. He said at the time that he intended to operate--not liquidate--the airline.

In recent months, Icahn, who is TWA’s chairman, has said he would like to find a merger partner for the airline. During his tenure of little more than a year, Icahn has reduced costs at TWA between 20% and 30% and has moved the once financially bleeding carrier into the black.

Louis Marckesano, airline analyst with Janney Montgomery Scott, a Philadelphia brokerage, said Icahn’s $52-per-share offer for USAir is too low. “I think it should be between $8 and $10 higher,” he said. “It’s a very confusing situation. I think that there is a real fight developing.”

“There are so many permutations here,” said Edward Starkman, who analyzes airlines for the New York brokerage house of Paine Webber. “There is a limitless number of possibilities as to how this will turn out.”

Starkman said he believes that Icahn still wants to get out of the airline business and that “TWA has become a much more attractive company than it was when he took it over.”

USAir Group was the sixth-most-active stock traded Friday on the New York Stock Exchange, up $2.75 to $51 on volume of 2.58 million shares. TWA dropped 50 cents to $31.50; Piedmont Aviation rose 50 cents to $68.25.